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- FRSH should be operating exclusively on its credit facility as of the end of Q2/14.
- FRSH has a history of poor cash management that has lead to the company being buried in debt and interest expense.
- FRSH expenses are growing faster than its revenues which doesn't help the company avoid debt or dilution.
- May 30 letter from Papa Murphy's Franchisee Association (PMFA) requests moratorium on fees for 31% of franchisees who are losing money. This highlights significant distress in the franchisee system.
- Author estimates that the implementation of PMFA's suggested fee moratorium would likely cause a 30% decline in EBITDA for next several years.
- With a heavy debt load, a 30% decline in EBITDA has a magnified impact on equity value. Author estimates 80% downside.
- If Papa Murphy's fails to act to save struggling franchisees, EBITDA could decline 50%. Given impact of debt, this would make the equity nearly worthless.
- Recent failure of Homemade Pizza suggests the take and bake concept may be fundamentally flawed. Author estimates base case that Papa Murphy's has 80% downside.
- Papa Murphy's is a recent JOBS Act IPO and a compelling short at the current price.
- The Company is priced for perfection, as the business operates in a low barriers to entry environment combined with a over-levered balance sheet.
- Further headwinds include franchisee issues, potential upcoming exit of the Company's financial sponsor, reduction in SNAP benefits and the closure of a sales tax loophole.
- FRSH hasn't shown they can create revenues that outpace expenses operating an otherwise efficient business model.
- FRSH is entering into a growth strategy with significant amounts of uncertainty for the first time in a long time.
- FRSH faces significant risk headwinds that they have no control over.
- Three financial metrics declined for 2013 vs. 2012: operating income percentage of revenue, cash flow percentage of revenue, and EBITDA percentage of revenue.
- Formed in 1981, it looks like FRSH has maxed out its growth potential in the U.S., with 1327 domestic franchisees.
- Lost money the last three years, although adjusting for early debt retirement costs, FRSH showed a marginal profit for 2012 and 2013.
- Per share dilution to IPO investors is -$20.21, which is high relative to the mid-range price of $12.
- Price-to-tangible book value is -1.5, which is very low and generally happens when private equity owners have sucked out as much cash as possible to pay themselves dividends.
- Papa Murphy's Holdings, operator and franchiser of the Papa Murphy's take and bake pizza chain, plans to raise $70.0 million in its upcoming IPO.
- Papa Murphy's has posted solid revenues, along with a small increase in net losses, over the past several years.
- We recommend investors wait on this IPO, given strong competitors, only decent underwriting, and slightly concerning losses.